What is the Right Mortgage Down Payment?

Low mortgage down payments are a mixed blessing for borrowers. The smaller
the down payment, the greater the monthly payment, interest expense, and
private mortgage insurance (PMI).

In many cases, the lender will require a minimum down payment - say 5 or
10 percent. Perhaps, you can afford to make a larger down payment.
Should you? This case study will show you how to weigh the pros and
cons of increasing the down payment on your mortgage.

Mortgage Down Payment Questions

When a borrower decides whether to make a big or a small down payment
on a mortgage, he/she should consider three key questions:

What is the minimum down payment required by my lender? The lender may
require zero down payment, 5 percent, 10 percent, or more.

What is the maximum down payment that I can afford?
This depends on your personal finances. Keep some funds
for daily expenses, other investments, emergencies, etc.

How much will I save? Compare the financial impacts of making a
minimum down payment with making a maximum down payment.

Use this site's
mortgage calculator
to assess the financial impacts of making a
minimum or a maximum down payment. The following case study illustrates the
process.

Minimum Versus Maximum Down Payment

Judy is buying a new home for $400,000. The lender requires a minimum down
payment of 10 percent (i.e., $40,000). Based on her personal finances, Judy can afford
a maximum down payment of $80,000. She decides to test both options. The
details of each mortgage appear below.

Minimum Down Payment

Maximum Down Payment

Mortgage type:

Fixed-rate mortgage

Mortgage type:

Fixed-rate mortgage

Loan term:

30 years

Loan term:

30 years

Loan amount:

$360,000

Loan amount:

$320,000

Interest rate:

7 percent

Interest rate:

7 percent

Down payment:

$40,000

Down payment:

$80,000

Points:

0

Points:

0

Other costs:

$0

Other costs:

$0

Additionally, the lender requires private mortgage insurance (PMI)
payments of $2400 per year, until the principal owed is less than
80% of the fair market value of the home. Here, the fair market value
is equal to the sale price - $400,000.

To compare the options, Judy uses the Mortgage Mavin
mortgage calculator.
The first step is to describe the analysis.

Choose "Compare two mortgages" from the Main Goal dropdown box
of the calculator.

Be sure the "Show amortization schedule" checkbox is checked.

Be sure the "Include mortgage insurance" checkbox is checked.

Under Loan 1, choose "Fixed-Rate Mortgage" as the mortgage type.

Under Loan 2, choose "Fixed-Rate Mortgage" as the mortgage type.

The calculator then displays text boxes to accept the data it needs,
and Judy enters
data from the above description into the text boxes. The
calculator settings and data entries are shown below.

Describe the Analysis

Main goal:

Options:

Show amortization schedule
Include mortgage insurance
Include hazard insurance

Include property tax
Include prepayments
Include tax deductions

Describe the Loan

Loan 1

Loan 2

Mortgage type:

Loan term (in years):

Loan amount ($):

Interest rate:

Describe the Costs Paid at Closing

Down payment ($):

Points (%):

Other costs and fees ($):

Enter Insurance Info

Annual mortgage insurance ($):

Appraised value of home ($):

After Judy clicks the
Calculate button, the calculator produces a summary report that
includes the following results.

Mortgage Attributes

Minimum Down Payment

Maximum Down Payment

Loan duration

30 years

30 years

Principal paid

$360,000

$320,000

Total interest expense

$502,222.63

$446,418.10

Down payment

$40,000

$80,000

Private mortgage insurance (PMI)

$20,200

$0

Total mortgage cost

922,422.63

846,418.10

Savings

. . .

$76,004.53

The summary report shows that a down payment
of $80,000 will reduce the total mortgage cost by $76,004.53, compared to a
down payment of $40,000.

It is important to note that the above savings occur over the full term of the
mortgage - 30 years. To determine the savings over a shorter time period,
Judy can refer to the
amortization schedule, which is also produced as an output of the calculator.
The amortization schedule shows month-by-month
mortgage costs for the minimum and maximum down payment. For example,
at the end of 10 years, the maximum down payment would save $46,259; and
at the end of 20 years, it would save $66,787.

Conclusion

This kind of analysis allows a borrower to assess the financial impacts of
different down payments. In this case, for example, Judy might conclude that
the savings ($76,004.53 over the life of the mortgage) are big enough to justify
making a maximum down payment. Or she might conclude that she would do better to
invest that money in the stock market. In either case, she would be making an
informed choice, based on a clear understanding of the financial pros and cons.